The SaaS movement is all about how customers buy and pay for value delivered. There is a dramatic shift with SaaS in how customers buy; hence, how we sell and incentivize sales teams. Before we can talk about how to adapt sales compensation plans to the new reality of SaaS, let’s understand how “we need to change our sales approach.”
Here are the key “sales approach” shifts happening with SaaS:
- Focusing on our sales process → Helping customers make buying decisions
- One big decision → Trying out things without exit barriers
- Bulk Purchase → Incremental purchases and “pay-as-you-go” and “pay-as-you-consume”
- Kill and move on → Land & Expand
- Will they sign → Will they be a profitable account (strategic qualification)
Previously, sales teams were more like hunters. Now they need to be both hunters and farmers—customer success. Even if customer success roles are separate in the organization, the way in which salespeople connect and sell sets up the foundation for customer success. Salespeople need to think beyond meeting their quota or maximizing their commissions; they need to build customer success-driven growth momentum.
The SaaS shift is also having a significant impact on company cash flow. Although there is a reduction in the “highs” of large deals, on the positive side there is more steadiness in long-term cash flow in addition to the potential for a reduction in overall sales costs. The SaaS movement has a huge impact on how we qualify and engage with customers, and how we incentivize our sales team.
Many software and technology companies that only sold “one-time” or “perpetual licenses” are now transitioning aggressively to selling “subscription licenses.” This is happening across the board for small and large value software licenses. This shift has huge implications on how companies sell and how they design sales compensation plans for their salespeople. There is a higher risk of dissatisfaction amongst sales teams due to lower upfront commission earnings on new customers since the value realization is pushed into the future.
On the other hand, the company has to be concerned about “retention” and “realization” from new customers and not pay commissions aggressively up front. This shift has huge implications on the sales force and sales plans. How companies handle the sales force structure, role and sales plan will decide who the winners and losers are during this huge shift.
SaaS Plan Design Considerations
Sales incentive plan design strives to optimize the interplay of three objectives:
- Incenting the right behaviors
- Protecting earning potential and cashflow
- Managing incentive spend ROI
Incenting the Right Behaviors
With SaaS, salespeople are no longer just closers and hunters. They need to be selective in the customers they acquire based on the long-term retention potential of the customer. Their focus has to be on transparency and value delivery to both the customer and the company.
The sales effort for a subscription fee model versus the upfront license model may not be that much less. So while revenues are realized over time, the sales effort is loaded up front. We need to recognize that and reward the salesperson with either a higher commission (on lower ACV of SaaS) or a sign-up bonus for new customer acquisitions.
At the same time, salespeople need to be tied to the long-term success of the client and hence need to have renewal, retention and up-sell components that are more aligned to how customer value realization works for the organization.
Case-in-Point: A technology company wanted to grow rapidly and increase the number of customers they had. They decided to give signup commissions to salespeople for any account they signed. At the same time, the company did not create specific qualification requirements in the sales or commission process. They felt they could have the same kind of success with more clients than they had with their past clients—who were very selectively picked. The end result—after two years—was poor revenue realization. Many of the customers they sold were not long-term buyers. Moreover, these were not ideal clients and, consequently, whatever revenue they generated was not as profitable.
To incentivize a long-term perspective in salespeople’s behavior, a company may combine both a carrot and a stick approach. The company can give bonuses for retention rates, renewal rates, up-sell and a profitable product mix. On the stick side, the company can also claw back commissions on customers if the customer discontinues within a certain timeframe, say they cancel in the first 6 months.
Another way to ensure the quality of customers is by rewarding managers and leaders on customer success factors such as CSAT, NPS and renewal rates. In the SaaS era, it is important to tie the salesperson back to the long-term success of the customers. They may themselves act as Customer Success Managers (CSM) or have a supporting CSM helping them. In either case, their commissions should be tied strongly to long-term revenue and the profitability of customers.
Protecting Earning Potential and Cashflow
When the transition to a SaaS licensing model is rapid for an organization, there is a reduction in first-year contract value (ACV) of new customers. To make up for this reduction in ACV and hence commissions, we need to reward the salesperson on subsequent year revenue through retention and renewals commissions.
By adding a retention and renewal component, we make the salesperson’s earning potential from a sale fair. However, there is a delay in realization which means that their current year commission cash flow would be negatively affected at the cost of future commissions.
To make up for that negative impact, companies can do two things:
- Increase the commission rate on first year ACV
- Provide a reducing guarantee on commissions that runs anywhere between 6 to12 months
The cash flow issue can also be mitigated by putting in an MBO or behavioral component for one or two years to help focus on the behavioral change needed, and by deciding how and what kind of customers should be acquired. For example, they could get a multi-product bonus or a bonus for certain product line ACV above a certain amount.
Managing Incentive Spend ROI
The shift towards SaaS models brings about significant “revenue realization,” “cost of sales,” and “cost of commission” changes for a company. Suddenly, the company is paying out more in commissions for “future revenue.”
The interplay between cash flow shifts, salesperson earning potential, customer lifetime value and customer acquisition costs have to be modeled accurately in designing the sales commission plan.
The incentive plan has to shift from direct upfront commissions to a combination of upfront commissions, subsequent commissions and additional metrics of customer success over time. The worst thing that a company can do is break the incentive bank on “bad sales” in terms of the lifetime value of a customer. Another thing to account for is not giving guarantees for too long such that they become handouts.
The movement to SaaS is a huge shift and it will impact organizations both negatively and positively. Organizations that adapt and change to the new way of selling will thrive and grow, while the others will languish.
To thrive, organizations will have to rethink and re-articulate their sales process and focus on delighting customers and creating customer success. Salespeople will need to be motivated to become value creators and to build long-term success (versus meeting quarterly numbers).
The sales compensation plans will have to be more nuanced and modeled extremely carefully to ensure that motivation is not only sustained, but also strategically aligned. The compensation plans will have to ensure that salespeople aren’t negatively impacted by the shift so that companies can avoid having to compensate them for the loss of income.
Moving to a SaaS model, if handled well, is a great opportunity for companies to leapfrog ahead of the competition.
Even with the pains of change, every disruption is a foreteller of a great opportunity!